4 Ways Smart Contracts Can Make Insurance Purchases Easier

Smart contracts could very well be the future for commercial insurers. So how can this technology make the claims process easier?
By: | July 29, 2019

Smart contracts will one day boost automation in the insurance process. The retail market is already working on it, but will the technology change the way commercial insurance operates as well?

A report commissioned by Lloyd’s of London strives to answer this question. Here are four ways that, according to the authors, smart contracts can make risk managers’ lives easier:

1) Quicker and Cheaper

In short, smart contracts are agreements between parties where words are replaced by code, so that they can be automatically read by computers.

As a result, the obligations set out in the contract are automated and can be self-executed.

For insurance buyers, that means depending less on the interpretation of clauses by loss adjusters and lawyers as indemnifications will be paid once objective criteria are met.

The whole process will thus be quicker and cheaper, possibly resulting in lower premium rates. It could also help insurance companies to fill coverage gaps by learning more about the risks faced by corporate buyers.

2) Enhanced Underwriting

The Lloyd’s report stresses the importance of data collected by companies that implement smart insurance contracts when it comes to improving underwriting processes.

In order for the whole thing to work, data must be provided by respected third parties, like meteorological agencies, or by reliable gadgets, like weather stations and cargo sensors. Information is added to contracts via safe, shared distributed ledger systems such as blockchain.

With this wealth of information in their hands, carriers should be able, with the time, to make better risk assessments and to price their coverage more accurately.

Smart contracts could also automatically adjust premium rates if conditions faced by the insured asset changes.

For example, ships that want to cut travel times may choose to pay higher rates for their marine insurance coverage and pick a route with higher piracy risks. The smart contract, in this case, would adjust the rate automatically and make the new charge directly into the client’s account.

And information about buyers themselves will be more plentiful, speeding up the analysis performed by carriers during the underwriting process.

3) Less Pain With Claims

For insurance buyers, however, the most attractive feature of smart contracts is the tantalizing possibility that, one day, their claims will be paid automatically without all the hassle they have to endure today.

Smart contracts can be linked to parametric insurance coverages, which already promise to pay claims if some pre-agreed triggers are met.

The idea is that, once the coverage is triggered, the smart contract already proceeds to pay the indemnification, with no need for loss adjusters to get in the mix or even to contact the carrier.

In addition to that, in layered programs, payment by followers would be automatically made once the lead carrier approves the claim.

The report concedes that this kind of improvement only looks realistic to high volume, small value claims. These claims, however, amount to 85% of all Lloyd’s claims, and plenty of headaches for risk managers.

But they can also play a role in high value, complex claims that will always require human adjustment. In this case, smart contracts can send automatic alerts to the different parties involved whenever action needs to be taken.

4) Combating Fraud

Another benefit of smart contracts could be the reduction of insurance fraud.

In theory, they can be implemented with different computer technologies. But the tendency is that they are integrated into distributed ledger systems such as blockchain, which main premise is that every change in the contract is permanently recorded. This reduces the risk that participants in the contract might try something funny and avoid detection.

Also, data from past claims will be readily available to help identify non-conformity in the fast-moving claims handling process.

The Challenges Ahead

Smart contracts can introduce important enhancements to the insurance process, but the report stresses that some challenges still need to be tackled before their benefits reach buyers.

First of all, there is no international regulation specific to smart contracts, which could raise issues in coverage particularly in civil code jurisdictions, which is the case of most EU countries. Data privacy is another sticky point.

It is also not clear how the insured will be able to defend their views if they do not agree with an automatic decision not to trigger a coverage. Lloyd’s acknowledges that a mechanism needs to be crated to address potential problems linked to the self-executing character of the contracts.

And not all kinds of risks are liable to be framed into a smart insurance contract. So far, the most promising options are those that can be covered by parametric insurance, which already offer a significant degree of automation.

Telematics technology could create opportunities in areas like aviation insurance, cargo and agriculture. But the report forecasts that, for a while, smart contracts are more likely to complement traditional ones, executing simpler tasks like the collection and distribution of premiums, particularly in the case of complex risks.

Lloyd’s also see more potential to implement the technology on treaty reinsurance, that can be more easily standardized, than on facultative contracts, which can be more varied in form and substance. &

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected].

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